In One Chart: Warren Buffett’s favorite stock-market indicator ‘scares the bejeezus’ out of this investor

In One Chart

Warren Buffett


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Billionaire investor Howard Marks just told CNBC on Monday that “the world is more screwed up” than what the action in the stock market might lead you to believe.

Gary Evans of the Global Macro Monitor blog would agree.

“After the Fed effectively fully nationalized the financial markets by bailing out junk bonds on April 9th, turning Wall Street into a Soviet Sausage Factory, almost any type of analysis, which was on its way out anyway, was rendered completely meaningless,” he said.

But that didn’t stop Evans from offering up some analysis anyway.

“The market does appear to be looking forward to the other side,” he wrote in a blog post on Sunday. “What we are seeing scares the bejeezus out of us, however.”

And what he’s seeing is a valuation metric — Warren Buffett’s favorite — that is trading at its 94th valuation percentile even as “unemployment heads to the worst levels of the Great Depression, more than half of the Los Angeles workforce is unemployed, and uncertainty still reigns.”

Evans pointed to a recent comment from Buffett’s right-hand man that shows how hesitant the men behind Berkshire Hathaway
BRK.A,
-2.22%

are in this climate.

“I would say basically we’re like the captain of a ship when the worst typhoon that’s ever happened comes,” Berkshire’s Charlie Munger said. “We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity. We’re not playing ‘oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves [into buying businesses].”

Read:Here’s the real reason why Buffett is sitting on all that cash

So, what is Evans doing to navigate this volatile market?

“This bounce is an incredible gift to rebalance, take some risk off, go to the virtual beach and wait this thing out,” he wrote. “Still sitting on the couch with cash and gold. We’ll let you trade the noise.”

Sitting on that “virtual beach” probably felt pretty good during Monday’s session, with the Dow Jones Industrial Average
DJIA,
-2.31%

closing down almost 600 points. The S&P 500
SPX,
-1.87%

and Nasdaq Composite
COMP,
-1.40%

also finished firmly in the red.

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